Legal Insurrection readers may recall that the last time we checked on the status of the recent banking crisis, a mixture of bank sales and federal assistance staved off an escalation of the troubles. It concluded with federal regulators holding an auction for First Republic.
Investigations into Silicon Valley Bank, the first bank that was poised for collapse in spring’s cycle of failure, blamed the troubles on “a combination of extremely poor bank management, weakened regulations, and lax government supervision.”
Now Moody’s Investors Service has cut the credit ratings of 10 U.S. regional banks and said it was reviewing the ratings of six other institutions. The service explained it was concerned that the banks suffered from the same weaknesses in the banks as the ones we reported on earlier this year.
Moody’s Investors Service cut the credit ratings of 10 U.S. regional banks and said it was reviewing the ratings of six other institutions, pointing to lower profits and higher funding costs.Shares of M&T Bank (MTB), Pinnacle Financial Partners (PNFP) and Commerce Bancshares (CBSH)—among the banks Moody’s downgraded—were all down 2% or more in morning trading All the cuts were by a single notch, and all the banks remained investment-grade….Moody’s is reviewing its ratings on six others, including Bank of New York Mellon (BK), Northern Trust (NTRS), State Street (STT) and US Bancorp (USB), and has assigned a negative outlook to 11 more lenders.The Moody’s action suggests the U.S. banking sector remains vulnerable to the problems that stirred a banking panic and brought down several smaller lenders, including Silicon Valley Bank, earlier this year. Those challenges include devalued bonds, jittery investors, customer-deposit withdrawals and higher funding costs.
The list of banks with a negative outlook was also expanded.
The firm lowered the ratings of 10 banks by one rung, while major lenders Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers and Northern Trust are now under review for a potential downgrade.Moody’s also changed its outlook to negative for 11 banks, including Capital One, Citizens Financial and Fifth Third Bancorp….“U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Moody’s analysts Jill Cetina and Ana Arsov said in the accompanying research note.
Bank stocks fell on the news.
Everything was looking good for bank stocks following the turmoil that occurred in March. The SPDR S&P Bank (ETF KBE –1.32, ticker: KBE) and SPDR S&P Regional Banking (ETF KRE –1.28%, KRE) had both rallied out of the trading hole they entered during the sector upheaval, and even looked set to break higher. Then Moody’s stepped in late Monday with ratings downgrades on 10 lenders, while putting six lenders on review for downgrade, and giving negative outlooks to 11 banks.
That sent the SPDR S&P Bank ETF and SPDR S&P Regional Banking ETF down 4% and 4.3%, respectively, in early trading Tuesday with shares of some of the affected banks faring even worse. Bank of America ( BAC –1.91%, BAC), down 3%, and JPMorgan Chase (JPM –0.56%, JPM), down 1.8% were dropping, despite not being mentioned.
The move is partly attributable to the depressed commercial real estate market and the banks’ risk exposure. The trends do not look positive.
The office market remains under pressure, as much space goes begging amid the continuing work-from-home trend. The national office vacancy rate reached 18.9% in the second quarter. On the construction front, the total growth in office space inventory in the first half of 2023 stayed well below the historical average.Vacancy rates have even further to rise as remote work remains popular. American workers on average are coming into the office only half as frequently as in 2019. Metro areas with lots of tech companies will continue to feel pressure, given their high rates of remote work. Asking and effective rents haven’t changed much over the past four quarters as demand for office space has remained volatile.Financing for offices is drying up. Delinquency rates for securities backed by commercial mortgages on offices rose to 4.5% in June — the highest level since 2018. The rise in delinquencies is leading some investors to stay away from commercial mortgage-backed securities with too much exposure to offices.
The cherry topper of this news: Moody’s predicted a mild recession.
“We continue to expect a mild recession in early 2024, and given the funding strains on the U.S. banking sector, there will likely be a tightening of credit conditions and rising loan losses for U.S. banks,” the agency said.
Let’s hope the economic consequences of Bidenomics are only a mild recession. These signs do not look promising.
And we can add this news to the long-lost subjects the mainstream media is not inclined to cover in depth.
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